Elements of economics -- part 2, End the Fed

[ClaytonB]

On the eve of the anniversary of JFK's assassination, it's a good idea to take a moment and reflect on the damage done by the Federal Reserve.



If you haven't already watched this lecture in full, you should watch it. This is the single best introduction to the origin of the Federal Reserve you will find, short of reading Rothbard's book, The Case Against the Fed. The short-short summary: The Federal Reserve is a banking cartel that has been established by an act of law, therefore, it is not unstable to dissolve, like privately-enforced cartels are.

The founding of the Federal Reserve is the diametric opposite of the story we are told in civics textbooks. It is actually the third central bank that was founded in the US. The first and second central banks were overthrown politically by the anti-Hamiltonians among the Founding Fathers (and their ideological heirs) who understood that inflationary money was doomed. (Even before the first central bank was founded, the Continental Congress had experimented with paper money, which was quickly and predictably devalued to nothing.) According to the accepted history, there was an outcry from "the market" for "stability" and "wise regulators stepped in" to "provide stability" in the form of a central bank "backed by the government", and so on and so forth. "Once upon a time..." and other fairy tales you have heard.

The Federal Reserve is not the first central bank in history. The Bank of England is much older and it is the model on which the Fed was designed.

The main objective of the Nationalists, who were also known as Federalists, was essentially to establish an American version of the British mercantilist system, the very system that the Revolution had been fought against. Indeed, it was this system that the ancestors of the Revolutionaries had fled from when they came to America. As Rothbard explained, their aim was

To reimpose in the new United States a system of mercantilism and big government similar to that in Great Britain, against which the colonists had rebelled. The object was to have a strong central government, particularly a strong president or king as chief executive, built up by high taxes and heavy public debt. The strong government was to impose high tariffs to subsidize domestic manufacturers, develop a big navy to open up and subsidize foreign markets for American exports, and launch a massive system of internal public works. In short, the United States was to have a British system without Great Britain. (p. 192)

A brief look at inflation

"First, do no harm" -- from the Hippocratic oath

1: Inflation is always and everywhere a monetary phenomenon (Milton Friedman)

Translation: Broad inflation occurs because central banks print money. In a hard money economy, there are small fluctuations in the value of specie as the monetary commodity is mined (for example, after the discovery of a new vein, the value of that monetary metal will decrease, resulting in "inflation" of prices denominated in that monetary metal). But the kind of inflation we see under the fiat regime -- more than 5% inflation in realistic CPI (energy, food, housing, transportation included), sometimes as high as 10% in a single year! -- would not be possible with a monetary metal, such as gold.

2: Inflation can never help

Way back in the 18th century, Hume discussed the consequences if we were to double overnight all account balances and cash in every pocket, as if by waving a magic wand. Would society be any richer afterwards? Well, obviously not. All that would happen would be a very brief moment of widespread confusion, after which, everyone would just adjust their prices by a factor of two, and move on. So, changes in the amount of money in circulation can never help. At best, increases in the amount of money do not harm anything, but can they hurt?

3: Inflation is always "uneven"

Starting at the 25:29 timestamp, Hoppe explains the unevenness of the effect of inflation (in the context of fractional-reserve banking). In the Humean thought-experiment, a fairy waves its magic wand and all balances are magically doubled overnight. But this is not how real inflation occurs. Rather, the central bank is like a money fountain and the central bankers, Wall Street moneybags, and big business cronies crowded around the central bank are the first users of the new money. So they get to spend new money at the pre-inflation purchasing power. Meanwhile, the riff-raff like us are forced to continue purchasing inflated goods and services with our pre-inflation paychecks. Sometime, much later, our paycheck will catch up with the real rate of inflation. But by that time, the central bank and its cronies will have printed themselves another fresh batch of cash so they can go out on the town.



This article continues to list some of the other destructive effects of inflation, besides those I have already mentioned. I'll reproduce the list here because it is so sweeping, but you should read the article:

- Inflation Causes Booms and Busts
- Inflation Prevents the Price of Goods From Falling
- Inflation Causes the Welfare State to Grow
- Inflation Destroys Families
- Inflation Corrupts People
- Inflation Expands the State Bureaucracy
- Inflation Makes People Materialistic, Envious, and Egotistical
- Inflation Depresses People
- Inflation Leads to Waste and (Natural) Resources Becoming More Expensive

It is crucial to understand that these are not merely "political talking points". No Austrian economist stands to benefit whether you believe these points or don't believe them. Rather, the destructiveness of inflation follows from two keys: (1) theoretical investigation, that is, academic study of economic theory and (2) the long experience of history, which has thoroughly proved out every conclusion of economic theory and, in fact, has often been a motivating factor for the development of economic theory in order to explain why systems that many people at the time believed would work, instead spectacularly failed.

If you want talking points, here's Hans Hoppe obliterating central banking to atoms in three minutes flat:



His remarks are as true as the rest of the economic theory, but don't confuse economic theory with talking points. The soft-brained leftists are trapped in a literal delusion... they literally believe that reality is some kind of "ideological tug-of-war" and if you can just get everyone to belieeeeeeeeeeve in central banking, why, then central banking really will work! Of course, the con-man running a game of three-card monty also has a system that will work if only you believe ... if only you place your confidence in the con-man.

For reference, here is the rest of the playlist introducing Austrian Economics: Introduction to Austrian Economics (playlist)


Academics is not everyone's cup-of-tea, but it is absolutely essential that the liberty movement preserve its scholarly core because liberty is not merely a question of preferences in some ideological tug-of-war. Liberty is the Truth. And the Truth is omnipotent. Power does not come out of the barrel of a gun or fromm the end of a baton. The power of truth is actually infinite. No force can refute 2+2=4, not even the Leviathan. Every force in heaven and earth must and will bow to the Truth. There is no greater law because there cannot be a greater law. The Truth is omnipotent and it is inevitable. This is why we must understand the Truth so that we are prepared to patiently explain it to those who have gone to war with it, to their own demise.